Democrats rolled out a plan Wednesday to address rising foreclosures that would temporarily increase caps on the loan portfolios of mortgage repurchasers Fannie Mae and Freddie Mac and provide more money for housing counselors.

Comparing the impact of the housing downturn and upheaval in mortgage markets to Hurricane Katrina, top Democrats including Speaker Nancy Pelosi and Senate Majority Leader Harry Reid urged President Bush to appoint a special advisor to coordinate the government’s response. For less than is spent in one day on the war in Iraq, they said, the government could provide housing counseling to nearly 130,000 families.

Although Democrats proposed setting aside $200 million for foreclosure-prevention counseling, the heart of their plan relies on freeing up government-sponsored entities (GSEs) Fannie Mae and Freddie Mac to buy more mortgages.

The Bush administration, which has made expanding Federal Housing Administration loan guarantee programs the centerpiece of its foreclosure relief plan, has generally opposed expanding the role of Fannie and Freddie, which are for-profit companies that operate with government oversight.

Administration officials have said they might support a temporary increase in the $417,000 conforming loan limit, allowing Fannie and Freddie to purchase or guarantee more jumbo loans. But limits capping the GSEs’ overall loan portfolios at a combined $1.4 trillion should remain in place, they say.

The limits were instituted after accounting and management scandals led Fannie and Freddie to restate past earnings. The Bush administration maintains that because of their size, the GSEs remain a potential risk to the entire financial system and should not be allowed to take on large amounts of additional debt.

Administration officials have downplayed the significance of the portfolio limits, pointing out that they only apply to the GSEs’ loan purchases and don’t restrict Fannie and Freddie’s ability to securitize loans for sale to other investors.

But on Sept. 19, the Office of Federal Housing Enterprise Oversight granted Fannie and Freddie additional leeway to buy or securitize an additional $40 billion in mortgages during the next six months. OFHEO is allowing the GSEs to change the way the loan portfolios are measured, and permitting them to grow at the accelerated rate of 4 percent annually during the fourth quarter. After that, both GSEs will be permitted to grow their portfolios at the rate of 2 percent a year, a capability previously granted only to Freddie Mac.

The plan rolled out by Democrats on Wednesday at a Capitol Hill press conference did not specify how much more growth Fannie and Freddie should be allowed in their portfolios.

On Sept. 10, Sen. Charles Schumer, D-N.Y., introduced legislation that would raise the portfolio caps by 10 percent, and also boost the conforming loan limit in high-cost areas to $626,000 or the median home price, whichever is less. Schumer said at the time that his bill — SB 2036, the Protecting Access to Safe Mortgages Act — would allow Fannie and Freddie to purchase an additional $145 billion in mortgages.

Schumer’s bill was immediately referred to the Senate Committee on Banking, Housing and Urban Affairs, which has yet to take action on it. Schumer and banking committee chairman Sen. Chris Dodd, D-Conn., both support the latest proposal.

At the press conference, Democrats said they would seek additional funding for HUD-approved nonprofits that counsel troubled borrowers and help them negotiate with lenders.

A report released in April by the Joint Economic Committee, which Schumer chairs, found that it costs about $1,500 on average to provide such housing counseling, while a foreclosure can cost homeowners, lenders and local government up to $80,000.

While Democrats were critical of the Bush administration’s response to the housing downturn, Congress has been unable to resolve impasses to bills that would revamp oversight of Fannie and Freddie and update policies governing FHA loan-guarantee programs.

Alabama Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, issued a statement saying the only new idea in the Democrats plan was the creation of a mortgage “czar” to coordinate the government’s response to the housing downturn.


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